- Weekly global market focus
- FOMC policy in focus with Powell testifying this week
- Senate this week will get to work on infrastructure
- Q2 earnings season begins this week
Weekly global market focus — The U.S. markets this week will focus on (1) Fed policy as Chairman Powell delivers his semi-annual monetary policy testimony to Congressional committees on Wednesday and Thursday, (2) the Treasury’s sale of 3-year and 10-year T-notes today and 30-year T-bonds on Tuesday, (3) the beginning of Q2 earnings season with reports from Wall Street banks, (4) crude oil prices as the markets continue to watch how OPEC+ members react to the lack of a production-hike agreement for August, (5) the recent rise in the U.S. Covid infection rates due to the Delta variant, and (6) a busy U.S. economy calendar with key reports including tomorrow’s June CPI report (expected +4.9% y/y vs May’s +5.0%) and Friday’s June retail sales (expected -1.5% m/m).
China has a busy economic schedule this week with tonight’s June trade report (exports expected +23.1% y/y), Wednesday night’s Q2 GDP (expected up only +1.0% q/q), and Wednesday night’s June industrial production (expected +8.0% y/y vs May’s +8.8% y/y) and June retail sales (expected +10.9% y/y vs May’s +12.4% y/y).
FOMC policy in focus with Powell testifying this week — Fed Chair Powell will deliver his semi-annual testimony on monetary policy to Congressional committees on Wednesday and Thursday.
The Fed has so far managed to prevent a taper tantrum even though FOMC members at their last meeting on June 16-17 officially began discussions on when to taper QE. Mr. Powell, in his post-meeting press conference, downplayed the talks by saying they were only “talking about talking.”
Nevertheless, QE tapering is coming. The minutes from the June 16-17 FOMC meeting said that the time is not yet ripe for QE tapering, with the comment that “The committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue.” However, the minutes also said that “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings.”
A survey taken by Bloomberg in June showed a consensus that the Fed’s early warning of QE tapering will come at either the August Jackson Hole conference or the following FOMC meeting on September 21-22. That survey showed that 33% of the respondents expect the formal announcement of QE tapering in September, 10% in October or November, and 33% in December.
While QE tapering is on the horizon, the market believes that the Fed’s first +25 bp rate hike is more than a year away in early 2023, according to the federal funds futures market. The market is expecting a total of two rate hikes in 2023.
Meanwhile, FOMC members have turned more hawkish about rate hikes. The new FOMC dot-plot from the June 16-17 meeting showed that 7 of the 18 FOMC members are now expecting at least one +25 bp rate hike in 2022, and 11 of the 18 members are expecting a total of at least two rate hikes by the end of 2023.
Senate this week will get to work on infrastructure — The Senate returns today from its July 4th recess and will get to work on infrastructure legislation. The House, by contrast, has another week off and will not return to Washington until next Monday. Congress will only be in session for a few weeks and will then leave in early August for its August recess, not returning to Washington until after Labor Day.
The Senate within the next several weeks is expected to vote on both the $579 billion bipartisan infrastructure bill and the budget resolution that would provide the framework for a Democratic-only infrastructure reconciliation bill. The legislation for both those bills still needs to be finalized. Democrats are widely split on the proposed size of the reconciliation bill.
There continue to be doubts about whether the Senate will be able to pass a bipartisan infrastructure bill since ten Republicans will be needed to prevent a filibuster, assuming all Democratic Senators vote in favor. The bipartisan bill has yet to prove it has the revenue-raising measures necessary to pay for the bill. Also, Republicans are not happy that Democrats are conditioning the bipartisan bill on the reconciliation bill.
If the bipartisan bill doesn’t pass the Senate, then Democrats will simply roll the provisions into their reconciliation bill. However, there are doubts about how large Democrats can go with the reconciliation bill because of the desire of moderate Democratic Senators Manchin and Sinema to minimize the size of the bill and keep things as bipartisan as possible. The Senate will not begin voting on the final reconciliation infrastructure bill until this autumn.
Q2 earnings season begins this week — Q2 earnings season begins this week with 24 of the S&P 500 companies releasing earnings. Notable earnings reports this week include Goldman Sachs and JPMorgan on Tuesday; Citigroup, Blackrock, and Bank of America on Wednesday; Morgan Stanley and Bank of NY on Thursday; and State Street on Friday.
The consensus is for Q2 earnings growth of +65.8% y/y for the S&P 500 companies. The year-on-year figure is, of course, inflated by the fact that earnings dropped sharply in Q2-2020 during the height of the pandemic economic shutdowns, causing a very low year-earlier base. For all of 2021, the consensus is for earnings growth of +37.2%, more than recovering from the -12.2% decline seen in 2020.
